Be Money Smart – Make IT. Manage IT. Master IT.

Archive for the ‘Taxes’ Category

It is June of 2012 already, half of the year is almost over. In no time, we will see another new year. Time flies and it flies fast taking for a ride along with it. We should always plan and prepare for every possible situation. 2012 Tax season has come and gone but it’s time […]

Happy New year to everyone.. I hope this year bring a reasonable amount growth and prosperous to our country and everyone’s life as well. Let me start this year with blog on the update about IRS inflation adjusts on various tax items. Usually every year the Internal Revenue Service adjusts for inflation tax brackets, tables, […]

Mutual funds have been one of the safest avenues for many American to invest for the future whether its for retirement or kids education. Mutual fund companies have gained their reputation by showing good returns and solid growth. Many mutual fund companies have evolved strongly by good fund analysis with strong results and catering to various needs of the investor gaining investor sentiment from novice to veterans.

Many of us invest in mutual funds because it is bit safe and saves time as the fund managers are paid to do the job of portfolio analysis, effective investment by incorporating diversification and asset allocation strategies according to each fund’s goal. Another main reason, mutual funds are less expensive for amount of diversification and assets involved in the funds. If someone has to do the same kinda of diversification, it would cost more on transaction fees alone not to add other cost. So it is not prudent unless you have big asset to handle.

Above all, we look for good, solid return and performance. On the downside, we really don’t pay attention to the taxes on mutual fund earnings. We all know not all mutual funds are made equal but all them have the tax component associated with it. Taxes can be biggest drag on the funds performance. Every year many investors lose certain percentage points of fund returns because they don’t try to lower their taxes.

It is not a big science or need to learn lot of tax codes to implement it. Just by keeping certain aspects of tax saving concepts in mind and adapting them which will help you portfolio. Here is the list of 3 simple strategies/concepts you can follow while trying to invest in mutual funds.

1. Low Turnover Ratio – Check for a fund’s portfolio turnover ratio which is the percentage of its assets that were sold during the most recent quarter or year. If the fund has high turnover ration mean it is a more aggressive fund. For example, a turnover of 500% means a fund sold the equivalent of its entire portfolio of securities five times during the year. That raises a fund’s expenses, and the likelihood of capital gains taxes. It is a good idea to limit your tax consequences by avoiding funds that trade most of their holdings in a given year. That means being wary of turnover ratios above 50%.

2. After-tax Return – Like you calculate any material cost after taxes, calculate fund tax return after taxes. So look beyond a mutual fund’s pretax return is wise thing to do. After tax returns will give the right picture of profit margin after all the tax deductions. The tax-adjusted return accounts for capital gains, dividends and interest.

3. Capital Gain – If you are worried about big tax bill, it is good idea to analyze a funds possible capital gain exposure before you buy it. Possible exposure tallies capital gains that haven’t been distributed to shareholders and divides that number by total net assets.

If you don’t want to go through the head-ache of analysing every funds, you have option to go with tax-efficient funds or ETF’s.

Tax Efficient funds, also called as Tax Advantage funds, are structured and operated on reducing the tax liability faced by its shareholders. It uses variety of techniques to keep the taxes low by purchasing tax-free (or low taxed) investments such as municipal bonds, Low turnover ratio, Offsetting gains by selling other stocks at a loss and Investing in lower-dividend-paying stocks to minimize passthrough dividends.

In conclusion, mutual fund investment can really reap better rewards if you give little bit of attention every year and plan accordingly by lowering taxes.